Who said tax is boring?

Amnesty International

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The casual observer may be forgiven for thinking that last month’s announcement by the Israeli Income Tax Authorities of a new amnesty program for foreign undeclared income was motivated by the realization that if – as the US authorities close in on tax evaders – Israel does not act fast, all the “captured” tax of US citizens living in Israel will flow into the coffers of the US Treasury.

Back in 2005 the ITA started a Voluntary Disclosure Program to enable Israeli tax residents to come clean on their undeclared income. The scheme, which was open-ended, offered immunity from criminal prosecution but not much else. The announcement in November 2011 that Israeli residents coming forward by the end of June 2012 could hope to pay the tax, without interest or penalties, on undeclared foreign income was a far more tempting proposition.

The conditions under which the foreign undeclared income is eligible for the amnesty, beyond the requirement that the applicant has broadly not been caught red-handed, are flexible – but the sample list given by the ITA provides an indication as to the extent that this was aimed at immigrants: undeclared income from foreign assets inherited from, or gifted by, a foreign resident; undeclared income from foreign assets that were purchased using funds that arose from income taxed in Israel or income that was not liable to tax in Israel; and undeclared income from foreign assets that only became liable to tax from 2003 when the Israeli system moved from a largely territorial basis to a worldwide basis.

Remembering that Israeli-born residents were heavily restricted in their ability to invest legally abroad until the end of the last century, the bias towards Olim from “Western Countries” (which is a euphemism for the US, since the English, French, Canadians and others are just a statistical error in the ITA’s worldview of lost tax) is obvious.

Now that the IRS has won the battle in Switzerland and should soon finish bayoneting the wounded, it is widely rumored that the next stop on its tax-grabbing crusade will be the Holy Land. Hence, the timing could not be better for the ITA to step in and suggest that people pay up in Israel, which in most cases has the first right to tax. This may have a mitigating effect on subsequent disclosure to the IRS, given its newly instituted softer approach to dual citizens (see earlier post), especially where they have declared the income abroad – but it is too early in the day to draw any firm conclusions.

The potential downside in the whole affair is that any application under the amnesty is to be considered by a Star Chamber of senior income tax officials. There is a promise that, even if an application is rejected, the facts will not be used in evidence elsewhere.

When I read this, it reminded me of my first year in High School. There was a particular teacher who had an unfortunate habit of boxing pupils around the ears (which, judging by his level of intelligence, is probably what happened to him as a child). We quickly learned, as he approached, to raise our hands to cover our heads. He would then go through the standard ritual (which took longer each time, as the months rolled by) of telling a poor victim to put his hands down because he was not going to hit him; I do not need to finish the story.

However, in practice, it seems that it may be possible to initially present the facts to the ITA anonymously and only name names when it is fairly apparent that the application will be accepted.

Overall, these are interesting times for people who have undeclared income and there is a window of opportunity that could be, for many, the Last Chance at the OK Corral.